Building Credit Markets at Internet Speed

Transcript

[applause] >> Hey everyone. Um, so I'm Stani and been building now uh on Ethereum um pretty much a decade um and something that started as a sort of like a small um uh passion uh thinking about uh credit markets and lending and um uh before actually building on Ethereum, I um I used to have a fintech startup focusing on receivables. Um and one of the things that was uh quite fascinating is is is for me that uh to realize um how to actually connect uh credit uh across globally.

And once you can actually connect credits um and build at a at the internet scale, what could be actually uh achieved and why building credit uh at a sort of like a global internet uh scale matters more especially today than than ever before. So, when we look at all the uh um internet uh networking technologies, um you know, internet changed uh pretty much everything, right? So, uh it changed the way we think about uh information. Um lot of you including me uh grew up online where sort of like uh the amount of information that you had access um uh multiplied uh and you have more

sources. Uh you have commerce. Uh you can pretty much order anything, shop uh online today uh globally and that is just increasing uh the opportunity. Um and a lot of communications uh is is done by by by these internet uh uh protocols. So, everything sort of uh has been able to um become global and connecting uh people around the world to trade. And something that hasn't really, um, worked in the same way, uh, effectively is is credit.

Finance, uh, is becoming more global. Um, you can send funds around the world. There's still a lot of challenges that there. Um, and a lot of these technologies that we're building today, um, and on the Ethereum, uh, is about to change that as well, uh, on ongoing basis. Credit is sort of like the last chapter of of this story, um, and and the most, uh, uh, important one. And some of the reasons why, uh, credit is is hard to solve is is you have this, uh, coordination problem, right? So, credit is today very local. Um, you have, uh, different participants. So, um, you might have the lenders and and borrowers, uh, intermediaries. Um, you

have, uh, localized regulation, uh, localized, uh, capital as well. Uh, risk assessment and risk management. Um, and all this arounds, uh, the concept of of trust. So, before, um, building on on, uh, Ethereum and and starting off it, when I was building, uh, a fin- fintech startup, uh, earlier, uh, one one of the challenges is that while you're trying to build for a global audience, you're sort of, uh, siloed into these, uh, localized, um, uh, frameworks. Um, and that creates, obviously, a harder way to, uh, coordinate, uh, liquidity and do credit at a sort of, uh, internet and and global uh, scale.

And if we think about like a why this problem really, uh, exist and and and and why, um, wh- why actually how how do we actually solve it and what what does it give to us? I think one interesting, uh, point is that when you look at, for example, interest rates in in different, uh, regions, um, whether it's business loans on consumers on the institutional side you have different sort of discrepancies and part of that is is obviously the cost of capital that comes from capital inefficiencies or basically siloing on the liquidity and and the network effects that you can

you could create if the world will be more connected and some ways I see ethereum as this sort of like connecting connecting tissue and operating system where you can actually build this financial infrastructure that can power a lot of these transactions not just payments and not just moving funds around but an exchange of value but but but particularly credit and and assets so the biggest trade off that we typically see is that if you silo a lot of these opportunities globally you isolate markets and you have capital inefficiencies and it's harder to find opportunities

at a global scale and you can see this in in in different um regions where for example credit has a certain premium there's lack of liquidity even on business models that are very close to each other and can be priced more efficiently and when we are actually fragmenting credit what happens is is that that creates coordination capital coordination costs meaning that we're paying more for the liquidity and with these liquidity inefficiencies we're also reducing and and losing

opportunity at the same time and the reason this is extremely important is that credit is backing pretty much a lot of these opportunities that we have today and historically has has done so. You go any generation in history, you'll see that credit has been backing a lot of the industrial revolution railroads and even further in history. And I think also in today's world, for example AI and and in in infrastructure. So, credit can be a really valuable opportunity creator.

And when we think about the on-chain markets and how they empower credit and and finance in general, I sort of approach the problem-solving from more of a cost structure perspective. So, there's certain cost structure of doing business today, whether that's, for example, repo transactions um in in institutional desks or it's um other types of transactions. Typically comes with, for example, back office cost, negotiations, and all sorts of capital inefficiencies.

So, what Ethereum effectively does, it it creates this platform where anyone can actually program a lot of these functions that were done either manually in some way digitally but settled um at a at a, for example, lag between plus one or two days or more in the future. And this is quite interesting because effectively we can create use cases and we can create financial infrastructure that settles um on an ongoing basis and and at the same time um, able to actually ensure that you have the full transparency uh,

into the system and at the same time, you also have the, uh, actually full certainty of, of, of the execution. And then, as you have this base layer base layer, you can then build these protocols that actually acts and and brings the functionality of a, uh, financial system, where it's, for example, lending and and and and and, uh, exchanging value, uh, or moving value, uh, across the world, uh, globally. So, markets and, uh, infrastructure becomes, uh, automatically global, um, without this discretionary, uh, view.

And and that creates, uh, efficiencies, capital efficiencies in the system. And the access point is here very interesting because one, uh, particular part of that is that if you have a view on the, uh, infrastructure in the markets end-to-end, uh, you're able to price the risk, uh, and reward more accurately. And that should, uh, create more cost savings. So, by, uh, moving into an infrastructure, uh, that, uh, replaces a lot of the, uh, manual, uh, complicated, uh, and layered stack into a more programmable, uh, stack that is automated, brings these efficiencies. And I think that's the, uh, solution for bringing actually

adoption for, for, um, uh, on-chain, um, uh, lending and and other um utilities. Now, Aave is sort of a interesting example uh from the, from the side that's, uh, we started two years ago and, um, we've, uh, we processed over 1 trillion in cumu- cumulative loans, uh, so far, um, over 3.5 trillion, uh, in cumulative deposits and and and a peak of, uh, 75 billion in uh net deposits. So, Aave operates already in a in a a uh a quite significant uh financial network or institutional uh scale. Um and what

it what this proves is that you can actually use Ethereum and you can use protocols built on Ethereum uh at a significant scale and and and these this scaling has compounding network effects as more peers uh join the network. And in terms of lending, that means that more integrations uh using these same lending pools, being able to increase the liquidity, um make the cost of capital cheaper, uh and bringing more opportunity for using the the capital that is aggregated in decent just finance, um in protocols like Aave back into the real world and financing opportunities, uh whether that's in

lending, uh on institutional desks, uh or uh regionally as well. So, what we learned over time is that what now works for a lot of these uh native uh crypto assets and native native digital assets, for example, uh can also work on all the value that we have in finance. So, what we think also is that um approach where you have one market uh will not sufficiently be enough. So, typically in DeFi, a lot of these lending protocols are pooled models where you can pool liquidity together, uh enjoy the network effects of of doing so by being able then to withdraw liquidity

out of the pools uh and create uh programmatic uh sort of a lending facilities that um any participant can can join uh by posting a collateral, for example. And going forward, when all the value is coming on on chain, um and being is being utilized in DeFi, we need to find a trade-off of how we manage, for example, this capital efficiency that brings network effects for global scale, and how do we manage, for example, risk and and isolation at the same time.

And the here's the the the the main sort of like um idea. So, the more we can share liquidity, the more actually these network effects will grow globally, making capital cheaper, extremely competitive, that market participants can participate. But, at the same time, uh we have to think about how do we actually place ourselves in the capital efficiency and risk isolation spectrum in a way where we actually can ensure that what we do on chain actually um has good risk controls.

So, uh what we built is the Aave V4, uh which effectively allows to isolate risk, but at the same time, uh share uh liquidity across different pools, uh in a way that it's uh controlled. And why this is important is that in traditional finance, um a lot of the risk and opportunities are isolated uh also based on regions, based on uh different types of uh use cases and and opportunities. And the network effects on chain come actually when you can start pooling opportunities, but in a way where you have risk control uh features as well, where you can isolate the risk while

still being able to uh capitalize on the liquidity network effects. And what it means for new opportunities is the typical challenge for a lot of these liquidity networks uh in decentralized finance is the bootstrapping problem. And this is the same problem that, for example, Aave had in the early days, Um every protocol has it. Any opportunity that is coming on Ethereum has way to get the initial liquidity and how to grow that opportunity from a small experimentation into a global scale liquidity network.

And the shared pool model helps actually then to bootstrap these opportunities by creating a a new markets where liquidity can actually be shared up to a certain point and allowing to bring more assets into Ethereum. And this is particularly really important for RWAs, real world assets, where we introduce a new opportunity on the blockchain and actually have to incentivize the the usage as well.

So, things that can be built on this type of a model, obviously this allows to bring new assets on on chain and actually utilize them. So, one of the main challenges for a lot of institutions is to understand the benefits or the benefits of tokenization, but also the next steps that follow after that. And for me, tokenization the big part of tokenization is actually the utility that it opens up in an open financial system like Ethereum. And and in that case, Ave as a lending protocol, what it allows is to actually take that opportunity from

tokenized assets, make them usable and then actually bring benefit for those users. And as that opportunity scales, the cost structure is is what actually then moves a lot of these assets on chain and the liquidity aggregation is what then reduces the cost of capital. And cost of capital is really important and as we know that a lot of lenders typically want to get a lot of deposits from wider audiences like retail audiences to access the the the low cost of capital.

Now, I think that would change in the future in a model where actually the the low cost of capital will always come from DeFi over time because that is where capital gets aggregated into the best financial opportunities in a risk-adjusted uh form. And that then allows to create a very wide network effects for liquidity that can be then be used in financing various different use cases. And these network effects benefit every single integrator as well because every integrator that integration that there is into

decentralized finance and and and lending networks down the line increases the the the capital in these pools. We have one interesting example from integration into Aave from Wabi, which is a e-commerce platform where the creators can actually use their balance from their earnings and earn on that balance directly on on Aave. And that's just that one one big and interesting use case how FinTechs are already thinking about decentralized finance and asset issuers are already by tokenizing assets and making those assets available to be borrowed against stablecoins and and creating utility for

RWAs. And I think one infrastructure that fits all use cases is very difficult to build, but what we had built is an infrastructure that is modular that fits uh different use cases depending what they are. Um and DeFi has shown that you can build a resilient financial infrastructure for native uh assets like Ethereum and and Bitcoin. And and the same infrastructure can then be used on actually all the assets that are coming on chain and then increasing the opportunity for everyone and bringing more transparency, more programmability, uh and more guaranteed execution for for everyone.

And I think um being able to borrow against uh uh securities, uh stocks, um credits, and being able to also uh lend securities directly on chain uh is going to show that uh efficiency as well and will give at some point a a really good comparison um towards the using the traditional uh infrastructure. And overall, uh I think uh uh credit is going to be a big opportunity. Um credit is something that is already happening uh in decentralized finance. It's something that we've been building uh in in uh on Ethereum for for almost a decade, but we're very early on on the on the

uh spectrum. I think this is just the beginning of a new financial uh world where infrastructure is run in permissionless uh network that are scalable to the internet scale for billions of people. Um And that will bring more opportunities. Um and I think that this infrastructure will be used to also uh fund opportunities that uh we need in the future from uh AI, uh data centers, uh infrastructure, solar energy, and everything that the world needs in the future. And DeFi is uh in a good place to solve it because uh it's a uh network where anyone can actually come, assess the risk, create

these markets, and eventually create the opportunity um for for everyone. So, I think um um it's going to be a really um exciting uh few years, uh especially because we're moving to a um phase on on Ethereum where um a lot of this technology is getting integrated. Uh a lot of institutions are looking on how to uh benefit from tokenization um and down the line on DeFi as well. So, I'd like to thank you everyone for coming to this talk and uh been very excited to uh see and and uh the conference being here actually uh in New York. And thank you so much.

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